The 2020 amendment to the Companies Act 1994, aims to address the intricacies surrounding the transfer of shares in a Private Limited Company. However, the issue remains unresolved. This article will analyze the problems, the impact of the amendment, and future ideas for addressing the issue.
The Shortcomings of the CA 2020 Amendment:
The first flaw in the share transfer procedure is insufficient proof of payment of the consideration amount among Bangladeshi nationals. This approach has opened the door for fraudsters to claim that they have paid the consideration amount after submitting the fictitious instrument of transfer without the knowledge of the transferor Ahmed Impex vs. Moqbul Ahmed. The Supreme Court of Bangladesh agreed with a suggestion that if there has been a transfer of shares, mere non-payment of the consideration would not prevent the transfer from becoming valid Tamizul Haque vs. Shamsul Haque. This loophole will definitely result in a slew of lawsuits.
Secondly, Uncertainty about share transfer finality poses a risk to transferees, as Sections 38 (3) and 38 (3) (KAKA) do not specify when shares are finally transferred. In Jabed Ali vs. Dr. Sultan Ahmed, the Court held that unregistered transferees' titles are incomplete, hidden, and "inchoate," making them unavailable against Respondent No. 1's (Dr. Sultan Ahmed) claim for registration.
The issue of improper adhesive stamps on transfer instruments has been a topic of debate in cases like Ahsan Karim Jinnah vs. Meghna Insurance since adhesive stamps on instruments of transfer have not been affixed and hence, cannot be accepted under Section 38 (3) of the Companies Act, 1994, making the transfer illegal. In Sher Ali Amir Ali Virjee vs. Eastern Industries, the Court ruled that the transferee could register their name as shareholders without producing the script. These cases raise uncertainties about the completion of share transfer procedures and the matter remains unresolved.
Thirdly, the issue of affixing Stamp Duty during share transfer is a significant challenge, as there is no specific time period. The Courts have raised this issue in many cases. As a consequence, the parties are now facing dilemmas regarding the time period to affix Stamp Duty.
Further, fraudulently transferring shares is a significant issue in share transfer processes, and Section 43 of the Companies Act 1994, empowers the Court to rectify the registrar of a company, but the Act does not incorporate fraud as a ground for rectification, leading to parties often attempting fraudulent activities. The Court remains silent on cases involving fraud, forgery and fabrication, as seen in Monjurul Islam vs. Al-Rajhi Hospital.
Additionally, the blank transfer is a black hole of law as it remains unclear to whom the shares are transferred. The transferee becomes the owner of the shares in equity, but this can deprive them of the shares they intended to transfer. In cases like Howrah Trading Co. Ltd. vs. C.I.TAIR, equities exist between the transferor and transferee, but the company is only liable to the transferor. The transferee does not receive the legal title of the transferred shares until they accompany the Share Certificate and the Instrument of Share Transfer.
Furthermore, the power of Company Directors regarding refusal of share transfer is not clearly governed. In Bajaj Auto Ltd. Vs N.K. Firodia in cases 1, 6, and 7 Supreme Court directors are required to act bona fide and not arbitrarily, and the question of bona fide is always a question of fact. The Court's struggle to define these terms would produce arbitrary decisions of the companies and the transferee would be deprived of legal entitlements.
The Impact of the New Amendment:
The Companies (2nd Amendment) Act, 2020 has evolved the share transfer procedure. Section 38 (3) (KAKA) of the Act has made it harder for fraudsters to commit fraud, as the transferor must appear before the relevant authority to confirm that their shares are transferred with their consent. Additionally, Section 38 (3) (KAKHA) of the Act makes the process more stringent for foreigners, requiring certification of documents by the Bangladesh Embassy or High Commission. This has reduced the blank transfer process and allowed courts to verify the transferor's intention, identity, and actual transfer of shares. However, there are still issues that have not been addressed by the legislatures or courts i.e. delay and lengthy process of share transfer for people living abroad.
Ideas for the Future of Share Transfer:
To address issues in the Share Transfer Procedure, legislators must include specific purposes for transferring shares, include proof of receipt of consideration amount and clearly state the means of payment (cheque, cash, etc.). The process of blank transfer must be changed to maintain the real intention of the transferor. If a shareholder’s objection arises, the regulatory authority must hold an inquiry to check the veracity of the transfer. Expert evidence should be taken mandatorily to detect illegality and fraudulent activities. The company must duly register the transferee's name in the Share Registrar, introduce a fixed period for Stamp Duty affixing, consider each application carefully, and state at which stage shares are conclusively transferred from the transferor to the transferee.
Therefore, the preceding discussion makes it abundantly clear that the share transfer procedure is evolving to address modern complexities as time passes. However, the current provisions of the Companies Act are far from resolving the share transfer's actual, technical, and practical aspects. Furthermore, the Courts are unable to resort to ongoing issues to maintain the doctrine of Separation of Powers. Inevitably, the Companies Act should shed some light on the aforementioned issues for the betterment of the infrastructure of the Companies.
References:
Statutes:
Companies Act, 1994.
Companies (2nd Amendment) Act, 2020.
Case Laws:
Ahmed Impex (Private) Ltd. & others Vs Moqbul Ahmed and others (2004) 56 DLR (AD) 92
Tamizul Haque Vs Shamsul Haque 43 DLR (AD) 34
Jabed Ali vs. Dr. Sultan Ahmed 26 DLR (1974) 303 & 312
Authors :
First Author
Md. Main Uddin
Advocate
District and Session Judges Court
Dhaka.
Second Author
Sambrita Bose
Legal Content Writer
LLB (Hon’s), University of London (International Program)
LLM, University of South Wales, UK.
